SMART Letter #29
November 7, 1999



           SMART Letter #29- November 7, 1999             

             Copyright 1999 by David S. Isenberg     -- "you can telephony, but you can't tell him much" -- -- 1-888-isen-com  




> Report on "The New Economy Conference"

> Conferences on my Calendar, Copyright Notice, Administrivia


Report on THE NEW ECONOMY CONFERENCE, NYC, Oct 27-29, 1999.

By David S, Isenberg

Lots of people define "New Economy" in lots of different ways 

-- I think it has three characteristics:

1.  Knowledge is wealth,

2.  Bigger ain't necessarily better, and

3.  There are more opportunities and fewer guarantees.

If there were a fourth, it would be that everything happens 

faster, maybe even instantaneously.

The New Economy conference, held last week in New York City, 

is one of a growing array of George Gilder branded meetings.  

(Gilder's "Telecosm" was held in September and his next 

"Disruptive Innovation" conference will be next week in 

Vancouver. Find more information at  

The hosts for New Economy were Spencer Reiss and John 

Browning, who were largely responsible for defining the term 

"New Economy" in their previous life at Wired.  The Wired 

issue with the green Godzilla picture and the headline, "Here 

comes the New Economy" was their work -- it introduced their 

Wired New Economy Index.


Reiss and Browning took a daring step -- they opened the 

first day of the conference with the most articulate, most 

respected critic of the New Economy concept.  Stephen Roach, 

the Chief Economist at Morgan Stanley, has been speaking of 

"the productivity paradox" for years.  He says that any 

economic benefits of the new information tech and 

communications tech are hard to measure -- if they exist at 

all.  In addition, he says, much of the supposed benefit of 

the New Economy is due to people being able to work more 


Roach says that productivity is defined by "work done per 

unit time."  He then goes on to define "unit time" to be the 

hour.  Clearly, we work more hours thanks to cell phones, 

home computers, PDAs, etc. Productivity per hour, says Roach, 

might even be going down.

But suppose that the "unit time" were the week?  Then 

productivity per worker per week would be going up, wouldn't 

it?  (I'd damn well better be adding value when they call me 

during a nice dinner out with my friends!)  Roach never did 

say why he chose "the hour" to be the unit of time that 

mattered.  And I betcha he thinks that productivity can be 

measured in money, too.  Hours, money -- these are old 

economy ideas.

Roach does seem to be softening a bit -- he now believes that 

infotech allows companies to do things they never did before, 

such as globalization.  But he doesn't know how to measure 

the benefits of globalization.

Throughout Roach's talk, I kept thinking about Clayton 

Christensen's analysis of how incumbents are locked into 

their value space by their products and their customers.  

Roach, though a brilliant economist and an articulate man, 

seems the essence of incumbency. Somebody at the conference 

confided to me that he decided not to become a Morgan Stanley 

customer precisely because Roach seems not to get it.

Not too long ago, they used to measure output by counting 

boxcar-loads, somebody said.  How many boxcars does the idea 

of hyperlinking fill?  Gosh, it must not be a productive idea.

Eric Brynjolfsson, of the MIT Sloan School, spoke after 

Roach. He said that we don't see Automatic Teller Machine

effects in macroeconomic measures of banking productivity.  

But he was willing (whereas Roach was not) to concede that 

there was value in customers being able to get cash without 

having to stand in line at only certain hours.  He seemed to 

think that "the new economy" meant new business processes, 

new markets, et cetera.  One interesting statistic he 

presented: a typical Enterprise Resource Planning (ERP) 

system costs $4 million for hardware and software, but 16.8 

million to implement and deploy -- no wonder ERP consultants 

are doing so well.  Despite an interesting talk, I still 

didn't find a solid New Economy peg to hang my hat on.


One of my favorite explainers of the New Economy, former Wall 

Street Journal columnist Tom Petzinger, who today creates the 

free e-zine The Petzinger Report ( was not 

at the conference, except in my mind.  He writes: 

   "Unless some dough changes hands, even the biggest

    commercial developments are trees falling in the 

    forest, unobserved quanta stuck in the never-never 

    land between wave and particle. The data mavens at

    Commerce have no idea that . . . I just downloaded 

    RealAudio 3.0 for nothing. They're blind to the value

    created when Yahoo! adds a new Web site listing or 

    when Mapquest shaves 0.6 miles off my trip. When the

    Labor Department calculates the Consumer Price Index 

    it has no idea that its own Web pages are being dished

    out on free source code . . . When Dr. Greenspan and 

    the poo-bahs at the Fed deliberate over the "irrational

    exuberance" of the stock market, how much weight do you

    suppose they're giving to the fact that the marginal 

    cost of a transaction in a world of e-commerce has 

    essentially dropped to zero?"

In the same vein, now that I am working at home (thanks to 

the new technologies), what value do Morgan Stanley's 

economists place on the fact that I no longer spend an 

unproductive hour and a half stuck in traffic?  Answer: 

probably none. They probably think the "economic activity" I 

produce with my car, hence my contribution to the economy, 

has declined. 



Presently the New Economy Conference turned to the new (?) 

laws of software. Java and Jini squared off against Linux. 


Java/Jini was represented by Bill Joy, who is also the brain 

behind much of Berkeley unix, and the vi full-screen editor.  

Linux, indeed the whole Open Source Movement we know today, 

was represented by expository genius Eric Raymond, who wrote 

"The Cathedral and the Bazaar", the must-read analysis of why

Open Source software works, and Robert Young, the CEO of Red 

Hat, purveyor of a turnkey version of Linux.

Open Sourcerers publish everything.  They, meaning anybody 

who wants to write code, have developed Linux from Linus 

Torvald's original kernel to full-functioned operating system 

right out in the open.  Eric Raymond explains that this 

creates a community of practice with a hands-on, practical 

understanding of the software. This community provides a lot 

of minds to work on the problems (and bright minds are 

attracted to challenging problems).  Furthermore, it subjects

an individual's code to skeptical, independent peer review.


Peer review is practiced with vigor in today's "pure 

research" scientific community.  It is the system that 

debunks bad experiments, ferrets out trivial explanations for

a seemingly profound result, and grudgingly admits bodies of 

work to "law-of-nature" status when they are found un-


Eric Raymond explains that this peer-review process, applied 

to software, leads to incredibly robust code.  Lots of 

different people can look at a given bug, or bug-fix, in many

different ways.  And the community can compare and contrast 

several bug-fixes, so that the best features can be gleaned, 

perhaps combined.


Raymond points out that business has not figured out how to 

do effective peer review.  Too often, some form of expediency 

rules the day.  It could take the form of "good enough," or 

the form of cronyism (if I don't cause her problems now, she 

will be good to me later), or the form of "good corporate 

citizenship," or the form of the "it's not my department" 

syndrome, etc.  To be effective, peer review must be truly 

independent, and it must come from experts and peers.

Raymond says that Linux is taking big chunks of Microsoft's 

NT market.  It is not eating much of the upscale unix market 

that is owned by, e.g., Sun.  He says that Linux is way, way 

more reliable than NT.  I want to believe it, but I am 

skeptical.  If anybody has empirical, independent Linux vs. 

NT reliability information, I'd love to see it (contact me at


Bill Joy spoke to an entirely different problem.  (He didn't 

tell the Java or Jini stories -- too bad, 'cause he is an 

articulate spokesman for these new paradigm-defining 

architectures.)  Instead, he pointed out that when everything 

is published, when there are no secrets, then innovators are 

not rewarded for their innovations.  (Yet another smart 

person equating reward and money.)  And he pointed to a new 

organizational form, the Chaordic Organization, which might 

be able to solve this problem.

Dee Hock, the founder of Visa, invented the Chaordic 

Organization as Visa's organizational form.  Chaordic is 

Hock's made up word.  It is a combination of chaos and order.  

He calls Visa a chaordic organization. Hock also calls Visa 

an inside-out holding company.  In other words, its members 

own it, rather than vice versa.  The members agree on the 

minimum that they need to own in common.  For VISA, this 

minimum is the brand and a small set of rules for clearing 

transactions.  Then, once that core agreement is set, Visa's 

members are free to innovate, to set their own rates, to go 

after each other's customers, to do their own advertising, 

etc., etc., etc.

Bill Joy wants to port the chaordic idea to software.  It 

would be a brilliant move.  A chaordic software organization 

could own a certain minimum set of standards -- the Java 

Virtual Machine, for example.  (Other examples might include 

an improved IP stack or a core (kernel + other essentials) 

Linux code set.)  Then companies could innovate -- and 

compete -- around that, each in its own proprietary, 

idiosyncratic, even harebrained way.  It is a brilliant idea, 

and quite consistent with Eric Raymond's thinking on how 

people make money in an Open Source environment.


But suddenly the session disintegrated into a "Methodists 

versus Presbyterians" debate.  Neither Eric nor Bill seemed 

to understand that they were explaining two different 

problems.  They started sniping at each other. In 

frustration, I jumped up, waved my arms and protested, "What 

about Microsoft?"  Both Bill and Jim denied that their ideas 

were about Microsoft.  (These days, what software issue isn't 

about Microsoft?)  Nevertheless, if I coulda taken it back, I 

woulda.  I shoulda pointed out that they were addressing two 

different, but not necessarily incompatible issues.  What's 

wrong with a chaordic Open Source movement?

(Dee Hock would have been a fabulous addition to this New 

Economy Conference.  He is one of my heroes, one of "The New 

Capitalism's" great thinkers.  I had the good fortune to host 

him during my last months at AT&T.  At the time, he told me, 

"An organization can tolerate, even celebrate its change 

agents -- until they start to succeed."  These were prophetic 

words -- in a few more months I was gone.)

(Unfortunately, Dee Hock belongs to the Peter Drucker 

consulting fraternity that believes that people will only 

value your ideas if they pay you until it hurts -- last I 

checked, he charged $25,000 a talk.  This would price his 

participation beyond all but the ritziest conferences.  The 

$25k might be necessary, but it is not sufficient -- did AT&T 


At the end of this New Economy Conference panel, I was left 

with three big questions.

1) What was Robert Young doing in that session?  He stood up 

there with his red hat and his red sox and his big Adam's 

apple looking geeky.  I don't remember most of what he said, 

except that what mattered about Red Hat was the brand.  Yeah?  

Anybody see the Cobalt IPO last Friday?

2) So how *do* you make money with Open Source software?  

Fortunately, Eric Raymond told me a few days later -- in 

another, decidedly older-economy venue.  See Eric's new book, 

or his "Cauldron" essay (at numerous websites).

3)Why did the Open Source Movement get so enthusiastic about 

re-doing unix?  Unix is an old, centralized, hierarchical 

system -- it is the OLD Software, hooked to the OLD Economy.  

Why doesn't it do an Open Source Java-like system?  It 

doesn't have to be Java per se.  But maybe there's a way to 

write a small virtual machine that can run anywhere, one that 

can support applications that are small enough to travel with 

their data.  Now that'd be a hard system for Microsoft to 

beat, and an easy one for tomorrow's world of tiny 

distributed devices to use.  


Some of these .coms can't possibly work.  That's what I 

thought when Yossi Vardi told me about his ICQ (the instant 

chat app).  But in a couple of years -- with no revenues, but 

lots of users -- he sold it to AOL for $300 million.  And 

that's what I thought about Yahoo, too.  (But one factoid I 

learned at the conference was that Yahoo's price at the end 

of its first public trading day was only 10 times its 1998 


Notwithstanding, when it comes to, I *really* can't 

see how it will work.  CEO Joseph Park thinks that Kozmo can 

deliver real-world physical stuff -- e.g., a pint of Cherry 

Garcia -- to I-hate-to-wait people in less than an hour.  But 

delivery costs are critical -- when the business is 

established and delivery efficiencies asymptote out, back-of-

the-envelope arithmetic indicates that each urban delivery 

will cost four bucks or so.   Costs rise even higher in the 

burbs, where Park says the bulk of his business is.  And Park 

is building his business around single-item delivery (at list 

price!). made big buzz at the conference -- 

skeptical, negative buzz.  Maybe there is something Park is 

not telling us.  Or maybe (how to say this nicely?) he is 

riding the backs of greater-fools towards a lucrative, but 

empty, IPO.  Or maybe my old-economy eyes need rose-colored 

lenses with a stronger prescription.

CUSTOMER-SHAREHOLDER: for love and money.

Loyalty is a problem when old-economy frictions liquefy.  

Customers follow price, quality, and expediency.  

Shareholders will sell in an instant if the numbers look 

greener on the other side of the fence.  But the customer-

shareholder stays attached for love and money.  

Consider the book buyer who also owns 100 shares of -- they wouldn't think of shopping Barnes & Noble 

to save fifty cents.  Consider the Boston Celtics fan and 

shareholder -- they will only root harder and follow the team 

more closely.

Holland Carney, of PR firm Alexander Ogilvy, introduced this 

new, simple, powerful concept in one of the best talks of the 

conference.  She says that the IPO is the ultimate branding 

event -- that NASDAQ has become a consumer marketing medium. 

The IPO lets the little guy, the one who's also your 

customer, participate. Carney thinks that PR firms might get 

disintermediated by VCs and investment banks in this process.  

Is her own company listening?  

Now that we understand this, companies that depend on 

building relationships with their customers can use the 

phenomenon consciously.  Are you listening, Metamarkets?


In another gutsy move, conference organizers Reiss and 

Browning put Joel I. Klein, the lead antitrust official of 

the U.S. Government, in front of the New Economy Conference 

audience of free-marketeers, Republicans and Libertarians.  

(Klein's face is all over recent news media because his 

office is prosecuting the Microsoft trial.  The judge's 

"finding of fact" was released last Friday, November 5.  But 

Klein spoke well before this, on October 28.) 


Klein made a strong case that a vigorous government anti-

trust watchdog is one of the U.S. economy's success factors.  

Consider that Japan was only yesterday an economic leader.  

But in today's Japan, "keiretsu" is short for lazy cronyism 

and monopolistic malfeasance that has been tragically 

unresponsive to the harsh hand of market reality.  

Klein did not comment directly on the Microsoft trial.  But 

he pointed out that active enforcement is almost a side 

effect.  The main benefit of having aggressive anti-trust is 

what *doesn't* happen when the function exists.  In such an 

environment, one "unthinkable" uttered by a government 

official can deflect a potential power grab that might take 

decades of court proceedings to undo -- this is cost-

effective deterrence.  

Given who this audience was, they let Klein off easily.  

Nobody took the ideological saw of government interference to 

Klein's position.  If George Gilder had been there (his other 

obligations caused him to leave the conference early) he 

might have pointed out that government prosecutions are 

costly, slow, and anti-innovative.  Furthermore, Gilder might 

have said that by the time such proceedings grind to a years-

later conclusion, they're likely to be totally irrelevant 

because the marketplace has moved on.  It could have been a 

juicy, highly topical confrontation.


The "media" panel was old, old, old economy.  It was about 

intellectual property that was owned by publishers and record 

companies, it was about conventionally structured newspapers 

that happen to have a web presence, it was about video 

entertainment from NBC and Murdoch.  It was hosted by Forrest 



None of the participants evidenced understanding that these 

days I get my news from my friends via email and from primary 

sources readily available on the net.  They didn't 

acknowledge the growing role of, e.g., Dave Farber's IP List, 

or the discussion board, or my own SMART 

Letter, or the power of personal relationships that develop 

among members of such lists.  They didn't seem to understand 

what MP-3 (and user-controlled audio-on-demand in other 

forms) represents, nor why the audio entertainment incumbents 

are screaming in panicked anger.  Nor did they seem to see 

the coming video-over-IP tsunami (and the death of video 

entertainment as we know it today) that MP-3 presages. 



There were many events at this conference that I will not 

report on.  Some, like Gilder's opening speech, and Clayton 

Christensen's presentation, covered already-familiar ideas -- 

I want to write about new stuff. At others, most notably the 

professional investor panel featuring Henry Blodget, David E. 

Shaw, and others, the specialized jargon whiffed past me in a 

cloud of dust.  Still other presentations disappear into the 

sulci of my cortex as time passes -- I am not the world's 

best note taker, and I forget what I . . . where was I?  

During other presentations, my mind or my body was elsewhere.  

I am especially sorry I missed a big chunk of economist Hal 

Varian's talk.  And other highlights, such as Chuck Frank's 

masterful MC shtick, John Perry Barlow's after dinner speech 

and the fabulous Umbilical Brothers performance that followed 

it, couldn't possibly survive my translation to mere words.

In hindsight, the conference was a gusher. Browning and Reiss 

will reprise it in October 2000.  If they're really corageous,

we'll explore this "money" thing, the decoupling of money and 

governments, and life in a post-monetary world.  In any case,

I hope to meet an expanded assemblage of the drink-from-the-

fire-hose set.

[A version of the above report first appeared (in several 

pieces) on the website, home of, 

the world's first on-line mutual fund.]



November 10-12, 1999.  Vancouver BC.  DISRUPTIVE INNOVATION 

with Clayton Christensen, George Gilder and many others.  I 

will be on stage with Bill St. Arnaud to discuss what comes 

after "telephony."

November 29-30, 1999.  Toronto ON.  CANARIE ADVANCED NETWORKS 

WORKSHOP.  The topic is "Optical Internet: From Information 

Highway to Information Main Street."  I'll be speaking on 

Nov. 30 on innovation at the edge.


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Copyright 1999 by David S. Isenberg -- -- 1-888-isen-com 


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